Ayala and Rizal Avenues

Luis F. Dumlao, Ph.D. is Associate Professor at the Department of Economics, School of Social Sciences, Ateneo de Manila University. This piece was published in the August 23, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

What is in for Ayala Avenue (my version of America’s Wall Street) and for JP Rizal Avenue (my version of America’s Main Street) in the first 100 days of P-Noy Aquino’s administration?

In terms of economic growth, a period of 100 days is too short, and there is not much one can do to speed up or slow down the gross domestic product (GDP). Consider my time series and real business cycle (RBC) metaphor of a car running 100 kilometers per hour (kph) on flat land. No act of man that can put the car in full stop or speed it up to 200 kph in three seconds’ time. If one does not step on the gas or the brake and let the car be, the car keeps its natural speed. The natural speed might be less than 100 kph, but no way drastically different from 100.

Consider that the GDP in the first quarter grew by an awesome 7 percent. Even if one sabotages the economy which P-Noy will not, one cannot induce a negative growth in 100 days. Even if government improves efficiency by 100 percent in 100 days (itself an impossibility), no way will the economy grow by 10 percent. RBC economics says that 5.5 percent growth is just natural and will be a good benchmark for the third quarter or the first 100 days. Come the end of the third quarter, the question should be why the economy grew by more than or less than 5.5 percent and not why the economy has a positive or negative growth. For Ayala Ave, passing the 5.5 percent benchmark will be a good indicator of business to come.

Unfortunately, this spells no difference for JP Rizal Ave. A case in point is recent history; the fastest and most consistent economic growth occurred from 2004 to 2007 with the economy growing within five to seven percent per year. No period in the past 30 years comes close to this. But the national poverty incidence increased from 24 percent in 2003 to 27 percent in 2006 and the increase is across most of the regions especially in the poorest regions in Luzon (Bicol), Visayas (Eastern Visayas) and Mindanao (Caraga and Autonomous Region of Muslim Mindanao).

This implies that the economy needs to grow faster at about 10 percent on a sustained basis or it needs to grow in a structurally different way. Growing by 10 percent per year is something that has not happened in the last 30 years. This implies that the chance of the economy growing by that starting the third quarter and on a sustained basis is improbable. Changing the structure in which the economy grows requires – for lack of a better term – changing the basis of growth from Ayala Ave (trickledown)-based to JP Rizal Ave-based. However, common sense says that structural changes do not happen in 100 days.

However, both avenues can pick up signals in the next 100 days of what might come for the remaining 6 years. Here are just some.

Signal number 1: if influential economic advisers start speaking along the lines of “we need to grow faster to fight poverty,” expect more of the same trickledown economics. The belief is that economic growth begins in Ayala Ave. In due time and with enough wealth, some wealth will overflow to JP Rizal Ave. Unfortunately, recent history says that the “due time” never comes. A good and the most recent example occurred from 2004 to 2007. Big business profits were high. Financial liquidity was ever so liquid—thanks in part to the overseas Filipino workers’ remittances—and residential real estate development began its boom (or bubble?) to this day. Yet for some reason, unemployment did not significantly improve. It is easily worse if not for the proliferation (or abuse?) of the contractual Filipino worker. Underemployment was and is still at the same rate. Poverty worsened.

Signal number 2 is the buzz word “public-private-ownership.” However one calls it, this is more of privatization for the next six years. Nothing wrong with it but nothing automatically right with it, either. In the Ramos years, this strategy contributed to government fiscal stability that contributed to three years of impressive economic growth. This was fine by Ayala Ave as symbolized by the Philippine Stock Exchange’s boom of the mid 1990s. But JP Rizal Ave thought otherwise as “Erap para sa mahirap” became the slogan leading to Estrada’s presidency.

Signal number 3 is the issue of the Metro Rail Transit (MRT). One harsh reality is that government subsidy will contribute to fiscal instability, which dominoes to financial instability, which creates havoc on the financial economy spelled Ayala Ave. Another harsh reality is that totally removing the subsidy will spike mass rail transportation to as much as P100 back and forth work, which is over 20 percent of the PhP410 minimum wage. Such an amount is understandably unacceptable for JP Rizal Ave. There is no such thing as zero or a total subsidy. There will be some compromise. Where will the new leadership position itself? That will signal whether it will be more with Ayala Ave or JP Rizal Ave for the next six years.

At the height of the E-VAT debate in 2005, the tax-to-GDP ratio was four percent. The E-VAT took in effect in 2006. While the E-VAT did improve the government’s fiscal position, the deficit-to-GDP ratio is back to four percent since 2009 to the present. However, when there is new leadership, crooks in government are scared and uncharacteristically legit, and honest people are hopeful, vigilant and inspired. So now is the best time for the new administration to raise revenue so as to lower the-tax- to- GDP ratio.

Signal number 4 is whether the tax-to-GDP ratio will decrease in the third quarter. If it fails to do so, expect more of the same. The government will have no choice but to eventually raise tax. Taxpayers both in Ayala Ave and JP Rizal Ave will have to pay more, and tax evaders in both avenues will keep on evading. This spells doomsday all over again to honest people. What is good for Ayala Ave is not necessarily bad for JP Rizal Ave and what is good for JP Rizal Ave is not necessarily bad for Ayala Ave. Their goods are not mutually exclusive. It can be and should be good for both. Raising the tax collection will signal good things to come for good people in Ayala and JP Rizal avenues.

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